415 excess

Plan terminates effective 5/2022.  After testing is completed it is determined that there are 415 excess amounts.  The plan removed them  from the pretax source.  How does this impact the 402g limit for 2022?

Participant deferred $8000. 

415 excess is $3000.  ($2500 is distributed due to losses).

What can the participant contributed on a pretax basis for the remainder of 2022 (assume not catchup eligible)?

Why are there 415 excess amounts?  Did the Plan termination explicitly change the limitation period?  Only 401(a)(17) would be pro-rated, but that still wouldn't reduce deferrals since the compensation to date is what was deferred upon.  This insinuates significant employer discretionary allocations, but most current plan documents prevent the allocation of employer discretionary amounts if it would result in a reduction of the employee deferrals.  Something is strange here, can you please share more about the 415 limit determination?

Some companies fund their match or safe harbor or profit sharing each pay period to amortize their cost over the entire year instead of making one big deposit, so 415 excesses can and do occur from time to time.

Maybe, but that would imply it's tied to payroll, and again that would be on the basis of compensation paid, so it shouldn't be possible to exceed.

@justatester can you help us with some details?

Sorry for the delay in getting back to your question...

What I believe happened.  The business was sold and the 401k plan was terminated as a results of the sale.  Since the plan terminated, the recordkeeper appears to have prorated the 415 dollar limit.  ( approx $28,000).  The plan had pretax, SH Match and ongoing PS.  The combination put the participant over the $28,000 threshold.  (I do not have the reason why the prorated the limit..but when the amended the plan to terminate, they may have also amended the limitation year)  Without having all the documentation, I can't say for sure what happened (trying to get additional details).  The new owner/employer is trying to figure out what the remaining allowable amount for 402g purposes. 

Assuming it is factually a 415 excess; once corrected it is then disregarded for 402(g), 415, ADP, and ACP.  So his year-to-date 2022 deferrals are currently $5000.

Otherwise, have the recordkeeper produce a copy of the plan document and termination amendment.  28k pro-rated suggests 6/15 termination date, that means 140k prorated compensation limit, if participant earned at least that, then sh match is 5.6k, meaning 14.4k profit sharing, >12%.  Not that profit sharing couldn't be that high, it would just be unusual in a sale & termination situation.

Justatester -  a quick observation FWIW - when a DC plan is terminated on a date other than the last day of the limitation year, under 1.415(j)-1(d)(3), there is deemed change of the limitation year - in this case, a short limitation year is created. So the fact that the 415 limit was prorated seems correct to me.

Here are the actual numbers:  Deferrals were $8125, SHM $3812.50, PS $17045.67 = $28983.17  (415 prorated $25,416.66)  Excess:  $3566.51 removed from pretax.  After correction has $4558.49 in deferrals.  So he can contribute an additional 15,941.51 for 2022?

If it was an ADP failure, it would not adjust his 402g for the remainder of the year?

On 6/7/2022 at 12:48 PM, justatester said:

Here are the actual numbers:  Deferrals were $8125, SHM $3812.50, PS $17045.67 = $28983.17  (415 prorated $25,416.66)  Excess:  $3566.51 removed from pretax.  After correction has $4558.49 in deferrals.  So he can contribute an additional 15,941.51 for 2022?

If it was an ADP failure, it would not adjust his 402g for the remainder of the year?

 

Correct & correct.